ANALYSIS. Freight hike will hurt downstream industries

The hike in freight rates in the Railway Budget will impact companies in the steel and realty sectors, while cement, power and urea producers may not be affected.

The proposal to increase rail freight for urea by 10 per cent will not have any impact on the profitability of urea producers.

This is because, the Centre reimburses freight costs incurred by these companies. However, the Centre’s subsidy outgo is expected to increase by over ₹200 crore on account of this. The cost of moving urea from the factory gate to the point of sale is reimbursed by the Government as subsidy.

Almost 80 per cent of the total urea consumed by India, which is about 30 million tonnes annually, is transported by rail.

The freight rate for the average distance of 772 km has now increased from ₹891.4 to ₹980.6, implying a 10 per cent increase.

While increase in freight rates will not have any direct impact, urea companies will have to depend on the Centre for recovering the incremental freight costs.

“As such, freight subsidy payments are not made on time so working capital and interest costs will rise,” explains Satish Chander, Director General, Fertiliser Association of India.

Coal freight rates have been hiked on average by 6.3 per cent a tonne per km. This would push up transport cost per tonne from ₹1.35 per km to ₹1.44.

The overall impact of this hike will be large, as the railways is the primary means for transporting coal. 

That said, the rate hike will not impact Coal India as the company passes on the freight charges to its buyers such as power companies. But downstream companies will feel the impact.

“The hike in freight rates for coal will push up delivery costs. This move is out of whack with the Make in India spirit and could have been avoided,” says Ravi Uppal - MD and Group CEO, JSPL.

For companies such as NTPC, that sell power under long-term power purchase agreements, the railway freight hike would be passed on to state distribution utilities and possibly the consumer.

Power tariff charged to the consumer could increase by up to 10 paise per unit as producers incur more for transporting coal.

 For companies such as JSW Energy that run large capacities on imported coal, the impact would be limited given that the cost of railway freight accounts only for a small proportion of the landed cost of coal.  

With the production of every tonne of steel requiring about 3 tonnes of raw material, a hike in rail freight of coal and iron ore could hurt company margins. The impact would be more for companies that have plants located far from ports, given that the demand for coking coal is largely met through imports. “Margins for the steel companies will come under pressure as they are competing with international companies which have an upper hand due to low raw material prices. Steel production cost is expected to go up by ₹100 a tonne” says Seshagiri Rao MVS, Joint Managing Director and CFO, JSW Steel.

“The planned expenditure on locomotives, coaches, wagons, track renewals and road-over-bridges would boost steel demand,” says Firdose Vandrevala, Executive Chairman, Essar Steel.

Due to low rake availability, only about 25-30 per cent of the cement produced is moved through the railways. So, the 2.7 per cent hike in rail freight for cement may not increase cost significantly.

However, the increase in rail freight for coal would impact cement manufactures as they use coal as a fuel.

A 6.3 per cent hike in coal freight charges will increase the cost per bag (of 50 kg) by about ₹1/bag.

Cement manufacturers may pass this on easily to buyers as demand also has been showing signs of picking up in the last few months.

Property developers are likely to feel the pinch of higher freight rates. For one, end users of coal such as steel and cement manufacturers may pass on the hikes. Also higher cement freight rates could further push up cement prices, which are already trending up.

Wage and land costs form the bulk of construction cost with raw material accounting for under 20 per cent of costs.

With the property market in many regions currently soft, developers may have to bear the cost themselves. So, higher steel and cement prices is likely to impact the profitability of developers.

(With inputs from Debabrata Das, Tomojit Basu and Suresh Iyengar)